Types of securities

A.

You see, I’ve found myself in a real predicament … . I cannot make out the difference between “stocks”, “shares” and “securities”.

B.

Oh, really? In a nutshell, in Britain stock is used to refer to all kinds of securities, including government bonds. The word equity or equities is also used to describe stocks and shares. The places where the stocks and shares of listedor quoted companies are bought and sold are called stock marketsorstock exchanges.

A.

And I believed that shares are certificates representing part ownership of the company … .

B.

And it is really so. Let’s get this right from the start. Ownership in a company is divided among stockholders or shareholders. The original shareholders are the people who started the business, but now they have sold shares of the profits to outsiders. By selling these entitlementsto share in the profits, the business has been able to raise new funds.

A.

Well this is it, isn’t it? Then everybody can easily buy into the company.

B.

To a certain extent, yes. For public companies the shares or stocks can be resold on the stock exchange to anyone prepared to pay the going price. Mind that even the largest company occasionally needs to issue additional new shares to raise money for especially large projects.

A.

Then to buy into the company, a shareholder must purchase shares on the stock exchange.

B.

Absolutely right. As a reward for this initial outlay, shareholders earn a return in two ways. First, the company makes regular dividend payments, paying out to shareholders that part of the profits that the company does not wish to re-invest into business. Second, the shareholders may make capital gains (or losses).

A.

So, if you buy company X shares for ˆ 600 each and then everyone decides its profits and dividends will be unexpectedly high, you may be able to resell the shares for ˆ 650, making a capital gain of ˆ 50 per share on the transaction. And if the company suffers a loss or goes bankrupt?

B.

The shareholders of the company have limited liability. The most they can lose is the money they originally spent buying shares.

A.

If the company stops trading because it is unable to pay its debts (goes bankrupt), or has to sell all its assets to repay part of its debts (goes into liquidation), is there any chance for the shareholders to get at least part of their money back?

B.

It depends. There are commonorordinary shares,andpreference sharesorpreferred stock.Holders ofpreference shares receive a fixed dividend that must be paid before holders of ordinary shares receive a dividend.

A.

I see … . So, holders of preference shares have more chance of getting some of their capital back in the case of bankruptcy.

B.

Yes, they are repaid before other shareholders, but after owners of bonds and other debts.

A.

Bonds? Are they the same as securities? Let me see … . The dictionary describes securities as “a certificate attesting credit, the ownership of stocks or bonds, or the right to ownership connected with tradable derivatives”. Oh, I cant make head or tail of it … .

B.

And I know it up and down and sideways. Security indicates either an ownership position in a corporation (a stock), or a creditor relationship with a corporation or a governmental body (a bond), or rights to ownership, such as those, represented by an option, subscription right or warrant. Thus, bonds guarantee to repay their face value after a certain number of years and pay a fixed rate of interest to the bond-holder in the meantime.

A.

I suppose that the price written on the share, the nominal value, is hardly ever the same as the price it is currently being traded on the stock exchange.

B.

Absolutely right in every detail. The market price depends on supply and demand and can change every minute during trading hours. Traders in stocks quote bid(buying) andoffer(selling) prices. The spread or difference between these prices is their profit.

A.

Very reasonable. And what about options? Are they also traded on the stock exchange?

B.

Of course. Actually, it’s a contract giving the holder a right to buy a designated security (this is a call option) or sell it (this is a put option) at or within a certain period of time at a specified price.

A.

If I’m not mistaken in a number of companies apart from salary an executive’s compensation package can include share options, the right to buy the company’s shares at an advantageous price. It’s a kind of benefits or perks.